Big Yield Opportunity
Dave is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Sometimes big opportunities lie in the places that aren’t viewed as sexy by most people. Consider the case of Kinder Morgan Energy Partners (NYSE: KMP), a pipeline transportation and storage company, among other things. If you want to find out how unsexy this company is, listen to its quarterly conference calls. It is loaded with details about each of its segments. For an analyst, it can be heavenly. For anyone else, it can cure insomnia. But not investing in KMP because it seems boring is a mistake.
Being a Master Limited Partnership (MLP), Kinder Morgan Energy must distribute most of its earnings in the form of a dividend. This dividend is what draws investors to MLPs such as Kinder Morgan Energy, which currently has a historic 6.3% yield. The word “historic” is key because it looks at last year’s payout compared to the current stock price. If you factor in growth, the actual yield for 2012 will be even higher. For example, KMP paid out dividends of $4.61 in 2011. The company plans to pay out $4.98 in 2012, bringing the dividend yield to 6.6% for 2012. That is a nice income stream to count on regardless of market or individual stock volatility.
For some perspective, let's look at how Kinder Morgan Energy's yield compares to some others in their space:
Boardwalk Pipleine Partners (NYSE: BWP) operates natural gas pipelines and underground storage facilities in the eastern and southern U.S.. At $5.5 billion, it has a much smaller market cap than Kinder Morgan Energy, which has a $25.7 billion market cap. However, at 8.1%, Boardwalk has Kinder Morgan Energy beat on dividend alone. I prefer Kinder Morgan though because of its ability to continue powering higher despite fluctuations in the economy. Boarkwalk was able to reclaim its stock price losses during the 2008 downturn. But since returning to the pre-market meltdown highs, it has been on a steady decline. Contrast this with Kinder Morgan, which had a relatively small decline in 2008 and has been on a big trend upward ever since.
Energy Transfer Partners (NYSE: ETP) provides a wide variety of services for natural gas, including transportation, treatment, processing, and conditioning. Similar to Boardwalk, Energy Transfer Partners has Kinder Morgan beat on the dividend at 8%, but has a smaller market cap of $10.3 billion. Also, similar to Boardwalk, I prefer Kinder Morgan because Energy Transfer Parters also made it back to near is pre-market meltdown highs only to steadily decline since then.
Magellan Midstream Partners (NYSE: MMP) is also in the transportation and storage business, but instead handles petroleum and ammonia, not natural gas. Magellan has a $7.7 billion market cap and a 4.9% yield. Like Kinder Morgan Energy, Magellan has been on a relatively steady uptrend since early 2009 and has surpassed its pre-recession highs. Magellan is an intriguing alternative, but I still prefer Kinder Morgan which has a better dividend and better scale already in place to help ensure that the dividends can be paid out.
KMP has had no difficulty expanding organically, as indicated by their consistent dividend increases over the years. However, their recent acquisition of El Paso stands to add tremendously to their already aggressive expansion in the natural gas transportation segment. Management expects 7% growth in 2012 with the El Paso acquisition. In a longer-term view, natural gas transportation has the potential to expand at an even faster pace. Domestic natural gas drilling activity has increased at incredible rates over the past several years.
Higher natural gas prices would certainly help keep drilling going at these levels, but that should level out in time regardless. That’s the benefit of being a transportation and storage company. Some drillers will get bigger, while others go out of business, but KMP enjoys receiving business from anybody who needs to move or store their product. Drilling may slow if natural gas prices stay low, but it would then stand to reason that natural gas prices would rise with the decrease in supply and then drilling would quickly pick-up again to take advantage of the higher prices, making any such production drop temporary.
The biggest risk for KMP is likely its own execution and staying ahead of trends as they develop domestically. While the company has grown very steadily over time, its quarterly earnings have been inconsistent, making for a bumpy ride higher. There hasn’t been much predictability when it comes to beating or missing consensus earnings estimates. However, growth is growth regardless of which quarters it appears.
Kinder Morgan Energy recently announced a secondary stock offering. This dropped the stock into the mid-$70s. It's tough to take if you owned the stock, but if you were waiting for an opportunity to buy, Kinder Morgan gave it to you with this secondary offering. The extra cash will be used to further invest and expand their business, which in theory will increase their distributions in the future. With a 6.6% yield for 2012 and an opportunity for that payout to increase in the future, KMP should provide excellent, consistent returns for years to come.
Just like every portfolio needs stocks that can offer huge upside, every portfolio needs stocks that can provide a steady stream of income, regardless of market or individual stock volatility. KMP offers a relatively easily defendable valuation based off its expected dividend payout and offers additional upside potential through unexpected growth opportunities.
Zaegs has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Magellan Midstream Partners, L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.